Blue Shield may lose exclusive CalPERS HMO contract

CalPERS' staff has recommended breaking up Blue Shield of California's statewide HMO contract and replacing with as many as four health plans.

Blue Shield of California may be losing its longtime grip on one of the healthcare industry's most coveted insurance contracts.

Officials at the California Public Employees' Retirement System are recommending breaking up Blue Shield's current statewide HMO contract and replacing it with as many as four health plans for more than 400,000 public workers and their families.

The CalPERS board of administration will consider its staff's recommendation next week and decide among seven companies that submitted bids. Once the winners are picked, CalPERS and the insurers will negotiate rates.

Four bidders appear to be in the running to grab some of Blue Shield's health maintenance organization business. They are Anthem Blue Cross, UnitedHealth Group Inc., Health Net Inc. and Sharp Health Plan.

CalPERS rated the bids from Blue Shield and those other four companies as "above average."

Kaiser Permanente has a separate HMO contract that's not part of this bidding, and CalPERS plans to renew it later this year.

In this statewide HMO contest, the financial stakes are huge for Blue Shield, CalPERS and taxpayers, who ultimately foot the bill for most of these public-sector health benefits.

CalPERS is the country's third-largest healthcare buyer, after the federal government and General Motors Co. It spends about $7 billion annually on medical care for 1.3 million active and retired government workers and their dependents.

Despite its enormous buying power, CalPERS has experienced significant rate increases similar to what other employers are grappling with. Its health premiums rose 9.6% this year, or nearly triple the current rate of medical inflation. These new, five-year contracts would start in January.

"The staff is not recommending specific companies, and it will be up to the board to select who they think best meets the needs for fulfilling this HMO procurement," CalPERS spokesman Bill Madison said.

CalPERS is Blue Shield's largest customer, and the nonprofit firm is still trying to persuade the agency to let it keep its statewide HMO contract, which it has held since 2003. Blue Shield has cautioned state officials against diluting purchasing power by splitting membership among several plans.

Blue Shield said it wants to better understand how the CalPERS staff arrived at its recommendation and conclusions. "Blue Shield finds the report confusing. It raises a lot of questions," spokesman Steve Shivinsky said.

Some healthcare experts doubt that Blue Shield will keep its lucrative contract.

"CalPERS is obviously going to change from the one-plan model they have now with Blue Shield," said Donald Crane, chief executive of the California Assn. of Physician Groups. "I think they want to spur competition, and it looks like they are succeeding at that."

In addition to the agency's contract with Kaiser Permanente, CalPERS' staff is recommending that the board offer four distinct HMOs in the state. The largest would cover 33 or more counties. Officials also recommend at least one other health plan for Northern California and two other HMOs in Southern California.

Two companies, Blue Shield and Anthem, submitted bids that meet that 33-county requirement. UnitedHealth, the nation's largest health insurer, bid for 21 counties across the state, and Health Net proposed an HMO for six Southern California counties, according to CalPERS. Sharp Health Plan is seeking a contract for San Diego County.

One consideration for CalPERS board members next week may be the potential disruption for employees and their families if they have to switch medical providers in a new health plan.

The CalPERS board rejected a bid from Blue Shield and voted last month to retain its current company, Anthem Blue Cross, for a five-year, preferred-provider organization contract. Anthem's three PPO plans cover about 360,000 CalPERS members and dependents.